3 Types of Franchising and the Differences Between Them

Franchisingis a business relationship that allows companies to expand their product and service offerings while giving entrepreneurs the opportunity to partner with an established brand and business model. The franchisor licenses its business model, procedures, know-how, and intellectual property, and the right to sell its products/services to a franchisee in exchange for fees and an agreement to adhere to company standards. There are various types of franchising and hundreds offranchise opportunitiesin countless industries, allowing those willing to invest some capital and work hard the chance to own and operate their own business.

When we speak about franchising, it is important to understand which type we are talking about. There are three general types of franchising:

Product Distribution Franchising

Business Format Franchising

Social Franchising

Here is a closer look at each type of franchise model:

Product Distribution Franchising

This franchise type closely mimics a supplier-dealer relationship and is typically found in theautomotive, computer, and soft-drink industries. Product distribution franchising deals mainly with large products such as automobiles, motorcycles, bicycles, auto parts, vending machines, and some of the inventory for gas stations and convenience stores. Some well-known examples of this franchise model include Pepsi Cola, Ford Motor Company, and John Deere farm equipment.

Though product distribution franchising is similar to dealer-supplier business relationships, the key difference between the two is that product distribution franchisors are more closely tied to their franchisees. For example, in a supplier-dealer relationship, the dealer might carry the products of the supplier as well as several other competing products. With a product distribution franchise, the franchisee is required to carry/sell/distribute the franchisor’s products on an exclusive or at least semi-exclusive basis. In return, the franchisee usually receives a far greater level of support from the franchisor than in a typical dealer-supplier relationship.

Business Format Franchising

The business format is by far the most common type of franchising in the United States. More than 80% of all franchises in the U.S. use the business format model, and this franchise type has been replicated successfully in numerous industries. In a business format franchise, the franchisor licenses the brand and business system, and the franchisee operates the business independently, but in keeping with certain standards laid out ahead of time in writing by the franchisor.

The main difference between the business format and the product distribution franchise types is that the franchisor is primarily receiving a business system which they can replicate, rather than a product which they market. That said, a product distribution franchisor may also provide a business plan, but that is not the main part of the package. By the same token, a business format franchise may also provide products to sell (e.g., McDonald’s and Subway supply their franchisors with food products), but the primary benefit the franchisor receives through the relationship is the brand and business model, not the product.

Within the business format model, you will find franchises of all types and sizes. There are the traditional franchises that require low to mid six figure investments for a location, building, inventory, and other start-up costs. But there are also franchise businesses you can operate out of your home with very little overhead other than the franchise fees and a few other costs to get started. Some franchisees have single locations or territories, others may decide to invest more and lock down several territories. The multi-territory strategy is great if you identify an emergingfranchise brand that looks likely to become much bigger and more profitable.

Another potential strategy for those with high-level management skills is the master franchisee/area developer. When a franchisor expands into a new region or another country, they often award master territories to those with a proven ability to oversee several individual franchisors. Once you become a master franchisee, you collect fees from individual franchisors who start businesses within the territory. For the right person with the right skillset, this can be a very lucrative opportunity that could quickly turn into a six or seven-figure annual income.

Social Franchising

A new and emerging type of franchising that is worth mentioning is calledsocial franchising. This model is a variation of business format franchising that is used to help promote social services primarily in third-world countries. Social franchising focuses mainly on the delivery of essential products and services such as food, safe drinking water, quality healthcare, and education that have been traditionally provided by churches, charities, governments, and non-government organizations (NGOs) often with less than satisfactory results. Unlike these other organizations, social franchising uses the business formatfranchise model to train local entrepreneurs to provide these essential offerings, generate profits for themselves, and create local jobs within their communities.

Which Type of Franchise is Right for You?

These days, franchising options are virtually limitless. If you are in the United States or another first-world country, there are numerous product distribution and business format franchises to choose from. For most entrepreneurs, however, the business format model has a lower barrier to entry with far more franchising options. If you live a third-world or developing country and/or you’re looking to start a business that helps lift a community out of poverty, social franchising is worth looking into.

AtNational Franchise Business Solutions, we deal primarily with business format franchising. We have access to over 600 franchise brands across a wide range of industries, and through a proven multi-step process, we work closely with aspiring entrepreneurs find the franchise business that best suits their passion, skills, and budget. There are never any consultation fees for our services, and if you eventually choose to partner with a franchise brand, the fee you pay is exactly the same whether you work with us or directly with the franchise company.